BILL NUMBER: SB 1528	CHAPTERED  07/21/00

	CHAPTER   170
	FILED WITH SECRETARY OF STATE   JULY 21, 2000
	APPROVED BY GOVERNOR   JULY 21, 2000
	PASSED THE SENATE   JULY 6, 2000
	PASSED THE ASSEMBLY   JUNE 29, 2000
	AMENDED IN ASSEMBLY   JUNE 1, 2000
	AMENDED IN SENATE   APRIL 10, 2000

INTRODUCED BY   Senator Hughes

                        FEBRUARY 17, 2000

   An act to amend Sections 1215.1 and 1215.5 of the Insurance Code,
relating to insurers.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 1528, Hughes.  Insurance.
   (1) The Insurance Holding Company System Regulatory Act sets forth
certain limitations with respect to the acquisition of subsidiaries
by a domestic insurer.  Under existing law, a domestic insurer is
authorized to invest in the securities of one or more subsidiaries
amounts that do not exceed the lesser of 5% of the insurer's assets
or 50% of the insurer's surplus as regards policyholders as long as
it retains a reasonable surplus, as specified, after making these
investments.  Existing law requires in calculating the amount of
these investments, that the total net moneys or other consideration
expended and obligations assumed in the acquisition or formation of a
subsidiary, as specified, be included as well as all amounts
expended in acquiring additional securities and all contributions to
the capital or surplus of a subsidiary after its acquisition or
formation.
   This bill would increase, from 5% to 10%, the percentage of the
insurer's assets used as one of the bases to measure the amount a
domestic insurer is authorized to invest in subsidiaries, and in
calculating the amount of these investments, would exclude
investments made by a domestic insurer in insurance subsidiaries.
   (2) The Insurance Holding Company System Regulatory Act also
requires that certain transactions involving a domestic insurer or
commercially domiciled insurer, as defined, and any person in its
holding company system, may be entered into only if the insurer
notifies the Insurance Commissioner, and the commissioner does not
disapprove the transaction within a certain period of time.  The
transactions subject to this provision include management agreements,
service contracts, and cost-sharing arrangements.  Existing law also
makes transactions by registered insurers with their affiliates
subject to specified standards, including each of the following:  the
fees charged for services and the terms of the transactions are
reasonable; expenses and payments are allocated to the insurer in
conformity with standard insurance accounting practices; the records
of each party clearly and accurately disclose the precise nature and
details of the transaction, including the requisite accounting
information to support the reasonableness of the charges and fees;
and the insurer's policyholder surplus, following any dividends or
distributions to shareholder affiliates, is reasonable in relation to
the insurer's outstanding liabilities and is adequate to its
financial needs.
   This bill would provide that a domestic insurer is not precluded
by any provision in the Insurance Holding Company System Regulatory
Act from having or sharing a common management or cooperative or
joint use of personnel, property, or services with one or more other
persons under arrangements that meet the above-described standards
governing transactions by registered insurers with their affiliates.
This bill would also provide that notwithstanding the control of a
domestic insurer by any person, the officers and directors of the
insurer remain liable for any obligation to which they would
otherwise be subject to by law and would require that the insurer be
managed to maintain its separate operating identity.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 1215.1 of the Insurance Code is amended to
read:
   1215.1.  (a) Any domestic insurer, either by itself or in
cooperation with one or more persons, may organize or acquire one or
more subsidiaries subject to the limitations of this section.
   (b) In addition to investments in common stock, preferred stock,
debt obligations, and other securities permitted under all other
sections of this chapter, a domestic insurer may also do one or more
of the following:
   (1) Invest in common stock, preferred stock, debt obligations, and
other securities of one or more subsidiaries, amounts that do not
exceed the lesser of 10 percent of the insurer's assets or 50 percent
of the insurer's surplus as regards policyholders.  However, after
these investments, the insurer's surplus as regards policyholders
shall be reasonable in relation to the insurer's outstanding
liabilities and adequate to its financial needs. In calculating the
amount of these investments, there shall be excluded investments in
insurance subsidiaries, and there shall be included (A) total net
moneys or other consideration expended and obligations assumed in the
acquisition or formation of a subsidiary, including all
organizational expenses and contributions to capital and surplus of
the subsidiary whether or not represented by the purchase of capital
stock or issuance of other securities, and (B) all amounts expended
in acquiring additional common stock, preferred stock, debt
obligations, and other securities and all contributions to the
capital or surplus, of a subsidiary subsequent to its acquisition or
formation.
   "Insurance subsidiary" is an insurer that is organized within the
United States and is controlled, directly or indirectly, by a
reporting insurer subject to this article.  For purposes of this
paragraph, "investments in insurance subsidiaries" shall include the
following:
   (A) Any direct investment in an insurance subsidiary.
   (B) The insurer's proportionate share of any investment in an
insurance subsidiary held by any subsidiary of the insurer.  This
shall be calculated by multiplying the amount of the subsidiary's
investment in the insurance subsidiary by the insurer's percentage of
ownership of the subsidiary.
   (2) If the insurer's total liabilities, as calculated for National
Association of Insurance Commissioners' annual statement purposes,
are less than 10 percent of assets, invest any amount in common
stock, preferred stock, debt obligations, and other securities of one
or more subsidiaries.  However, after this investment the insurer's
surplus as regards policyholders, considering this investment as if
it were a disallowed asset, shall be reasonable in relation to the
insurer's outstanding liabilities and adequate to its financial
needs.
   (3) Invest any amount in common stock, preferred stock, debt
obligations, and other securities of one or more subsidiaries,
provided, that each subsidiary agrees to limit its investments in any
asset so that these investments will not cause the amount of the
total investment of the insurer to exceed any of the investment
limitations specified in paragraph (1) of this subdivision or in this
chapter applicable to the insurer.  For the purpose of this
paragraph, "the total investment of the insurer" shall include (i)
any direct investment by the insurer in an asset, and (ii) the
insurer's proportionate share of any investment of an asset by any
subsidiary of the insurer, which shall be calculated by multiplying
the amount of the subsidiary's investment by the percentage of the
insurer's ownership of that subsidiary.
   (4) With the approval of the commissioner, invest any amount in
common stock, preferred stock, debt obligations, or other securities
of one or more subsidiaries, provided that after this investment the
insurer's surplus as regards policyholders shall be reasonable in
relation to the insurer's outstanding liabilities and adequate to its
financial needs.
   (5) Invest any amount in the common stock, preferred stock, debt
obligations, or other securities of any subsidiary exclusively
engaged in holding title to or holding title to and managing or
developing real or personal property, if after considering as a
disallowed asset so much of the investment as is represented by
subsidiary assets which if held directly by the insurer would be
considered as a disallowed asset, the insurer's surplus as regards
policyholders shall be reasonable in relation to the insurer's
outstanding liabilities and adequate to its financial needs.
   (c) Investments in common stock, preferred stock, debt
obligations, or other securities of subsidiaries made pursuant to
subdivision (b) of this section shall neither limit nor be subject to
any of the otherwise applicable authorizations, restrictions, or
prohibitions contained in this part applicable to such investments of
insurers.
   (d) Whether any investment pursuant to subdivision (b) of this
section meets the applicable requirements thereof is to be determined
immediately after such investment is made, taking into account the
then outstanding principal balance on all previous investments in
debt obligations, and the value of all previous investments in equity
securities as of the date they were made.
   (e) If an insurer ceases to control a subsidiary, it shall dispose
of any investment therein made pursuant to this section within three
years from the time of the cessation of control, or within such
further time as the commissioner may prescribe, unless at any time
after such investment shall have been made, such investment shall
have met the requirements for investment under any other section of
this part.
  SEC. 2.  Section 1215.5 of the Insurance Code is amended to read:
   1215.5.  (a) Transactions by registered insurers with their
affiliates are subject to the following standards:
   (1) The terms shall be fair and reasonable.
   (2) Charges or fees for services performed shall be reasonable.
   (3) Expenses incurred and payment received shall be allocated to
the insurer in conformity with customary insurance accounting
practices consistently applied.
   (4) The books, accounts, and records of each party to all
transactions shall be so maintained as to clearly and accurately
disclose the precise nature and details of the transactions,
including accounting information that is necessary to support the
reasonableness of the charges or fees to the parties.
   (5) The insurer's policyholder's surplus following any dividends
or distributions to shareholder affiliates shall be reasonable in
relation to the insurer's outstanding liabilities and adequate to its
financial needs.
   (b) The following transactions involving a domestic insurer or
commercially domiciled insurer, as defined in Section 1215.13, and
any person in its holding company system, may be entered into only if
the insurer has notified the commissioner in writing of its
intention to enter into the transaction at least 30 days prior
thereto, or a shorter period as the commissioner may permit, and the
commissioner has not disapproved it within that period.  The
commissioner shall require the payment of one thousand eight hundred
eighty-nine dollars ($1,889) as a fee for filings under this
subdivision.  The payment shall accompany the filing.
   (1) Sales, purchases, exchanges, loans, extensions of credit, or
investments, if the transactions are equal to or exceed:
   (A) For a nonlife insurer, the lessor of 3 percent of the insurer'
s admitted assets or 25 percent of the policyholder's surplus as of
the preceding December 31st.
   (B) For a life insurer, 3 percent of the insurer's admitted assets
as of the preceding December 31st.
   (2) Loans or extensions of credit to a person who is not an
affiliate, if made with the agreement or understanding that the
proceeds of the transactions, in whole or in substantial part, are to
be used to make loans or extensions of credit to, to purchase assets
of, or to make investments in, any affiliate of the insurer, if the
transactions are equal to or exceed:
   (A) For a nonlife insurer, the lesser of 3 percent of the insurer'
s admitted assets or 25 percent of the policyholder's surplus as of
the preceding December 31st.
   (B) For a life insurer, 3 percent of the insurer's admitted assets
as of the preceding December 31st.
   (3) Reinsurance agreements or modifications thereto in which the
reinsurance premium or a change in the insurer's liabilities equals
or exceeds 5 percent of the insurer's policyholder's surplus, as of
the preceding December 31st, including those agreements that may
require as consideration the transfer of assets from an insurer to a
nonaffiliate, if an agreement or understanding exists between the
insurer and nonaffiliate that any portion of the assets will be
transferred to one or more affiliates of the insurer.
   (4) All management agreements, service contracts, and cost-sharing
arrangements.  However, subscription agreements or powers of
attorney executed by subscribers of a reciprocal or interinsurance
exchange are not required to be reported pursuant to this section if
the form of the agreement was in use before  1943 and was not amended
in any way to modify payments, fees, or waivers of fees or otherwise
substantially amended after 1943.  Payment or waiver of fees or
other amounts due under subscription agreements or powers of attorney
forms that were in use before 1943 and that have not been amended in
any way to modify payments, fees, or waiver of fees, or otherwise
substantially amended after 1943 shall not be subject to regulation
pursuant to paragraph (2) of subdivision (a).
   (5) Guarantees when initiated or made by a domestic or
commercially domiciled insurer; provided, however, that a guarantee
that is quantifiable as to amount is not subject to the notice
requirements of this paragraph unless it exceeds the lesser of
one-half of 1 percent of the insurer's admitted assets or 10 percent
of surplus as regards policyholders as of the 31st day of December
next preceding.  Further, all guarantees that are not quantifiable as
to amount are subject to the notice requirements of this paragraph.

   (6) Direct or indirect acquisitions or investments in a person
that controls the insurer or in an affiliate of the insurer in an
amount that, together with its present holdings in those investments,
exceeds 2.5 percent of the insurer's policyholder's surplus.  Direct
or indirect acquisitions or investments in subsidiaries acquired
under Section 1215.1, or in nonsubsidiary insurance affiliates that
are subject to the provisions of this article, or in subsidiaries
acquired pursuant to Section 1199, are exempt from this requirement.

   (7) Any material transactions, specified by regulation, that the
commissioner determines may adversely affect the interests of the
insurer's policyholders.
   (c) A domestic insurer may not enter into transactions that are
part of a plan or series of transactions with persons within the
holding company system if the purpose of those transactions is to
avoid the statutory threshold amount and thus avoid review.  If the
commissioner determines that separate transactions were entered into
over any 12-month period to avoid review, the commissioner may
exercise his or her authority under Section 1215.10.
   (d) The commissioner, in reviewing transactions under subdivision
(b), shall consider whether the transactions comply with the
standards set forth in subdivision (a) and whether they may adversely
affect the interests of policyholders.
   (e) The commissioner shall be notified within 30 days of any
investment by the insurer in any one corporation if the total
investment in the corporation by the insurance holding company system
exceeds 10 percent of the corporation's voting securities.
   (f) For purposes of this article, in determining whether an
insurer's policyholder's surplus is reasonable in relation to the
insurer's outstanding liabilities and adequate to its financial
needs, the following factors, among others, shall be considered:
   (1) The size of the insurer, as measured by its assets, capital
and surplus, reserves, premium writings, insurance in force, and
other appropriate criteria.
   (2) The extent to which the insurer's business is diversified
among the several lines of insurance.
   (3) The number and size of risks insured in each line of business.

   (4) The extent of the geographical dispersion of the insurer's
insured risks.
   (5) The nature and extent of the insurer's reinsurance program.
   (6) The quality, diversification, and liquidity of the insurer's
investment portfolio.
   (7) The recent past and projected future trend in the size of the
insurer's investment portfolio.
   (8) The recent past and projected future trend in the size of the
insurer's surplus, and the policyholder's surplus maintained by other
comparable insurers.
   (9) The adequacy of the insurer's reserves.
   (10) The quality and liquidity of investments in subsidiaries made
under Section 1215.1.  The commissioner may treat any such
investment as a disallowed asset for purposes of determining the
adequacy of the policyholder's surplus whenever, in his or her
judgment, the investment so warrants.
   (11) The quality of the company's earnings and the extent to which
the reported earnings include extraordinary accounting items.
   (g) No insurer subject to registration under Section 1215.4 shall
pay any extraordinary dividend or make any other extraordinary
distribution to its stockholders until 30 days after the commissioner
has received notice of the declaration thereof and has approved the
payment or has not, within the 30-day period, disapproved the
payment.
   For purposes of this section, an extraordinary dividend or
distribution is any dividend or distribution which, together with
other dividends or distributions made within the preceding 12 months,
exceeds the greater of (1) 10 percent of the insurer's policyholder'
s surplus as of the preceding December 31st, or (2) the net gain from
operations of the insurer, if the insurer is a life insurer, or the
net income, if the insurer is not a life insurer, for the 12-month
period ending the preceding December 31st.
   Notwithstanding any other provision of law, an insurer may declare
an extraordinary dividend or distribution that is conditional upon
the commissioner's approval.  The declaration confers no rights upon
stockholders until the commissioner has approved the payment of the
dividend or distribution or until the commissioner has not
disapproved the payment within the 30-day period referred to in this
subdivision.
   (h) Notwithstanding the control of a domestic insurer by any
person, the officers and directors of the insurer shall not thereby
be relieved of any obligation or liability to which they would
otherwise be subject to by law, and the insurer shall be managed to
ensure its separate operating identity consistent with the provisions
of this article.  However, nothing in this article shall preclude a
domestic insurer from having or sharing a common management or
cooperative or joint use of personnel, property, or services with one
or more other persons under arrangements meeting the standards of
subdivision (a).
   (i) The provisions of this section do not apply to any insurer,
information, or transaction exempted by the commissioner.
